We may be about to find out what shape the UK recovery takes

Since the first cases of Covid-19 began to disrupt the global economy, economists have not been shy of predictions. V-shaped, L-shaped, even hockey-stick recoveries have all been on the table.

We may be about to find out who was right. While output growth and economic activity are still historically strong, in developed economies, those indicators are most definitely slowing.

The economic rebound from the Covid crisis has taken off since around mid-April when restrictions started to ease.

The rapid rollout of vaccines in developed countries has propelled consumer spending forward. Inoculations have allowed policymakers to lift restrictions on firms that rely on social and face-to-face interaction to generate income, namely, pubs, bars, restaurants and non-food stores.

UK retail sales in June were 9.5 per cent above their pre-pandemic levels in February 2020.

Demand is likely to run hot in the long run as households continue to draw down from savings amassed during Covid-induced lockdowns. Expenditures were slashed as the normal functioning of the economy was upended, resulting in many households setting aside their excess income.

Yael Selfin, chief economist at KPMG UK, thinks the consumption boom still has legs: “Although we expect a significant portion of [these savings] to be invested and spent over a long period of time, spending should also benefit in the short term.”

However, consumption in rich economies may be running out of steam. Latest data from IHS Markit on the US services industry shows new business cooled in July, prompting the firm’s chief business economist, Chris Williamson, to declare that demand may have “peaked.”

Similar slowdowns have been recorded in the UK. The UK services industry registered its lowest activity reading since March last month, while output in the construction industry was the lowest since February.

Spending is likely trending toward pre-Covid patterns due to the flood of pent-up demand turning into more of a stream. As a result, economic activity in rich economies is starting to cool following the initial Covid unlocking.

There are some emerging signs indicating businesses are struggling to scale production to cope with high demand amid severe shortages of key inputs.

Buckling supply chains are the root cause for widespread scarcity of raw materials and other inputs. This has mainly be triggered by ongoing Covid prevention measures – especially in Asia – reducing productivity in the logistics sector, meaning firms are either having to wait longer to secure inputs or pay through the nose to hold off competitors.

As a result, companies that undertake large scale construction projects are more susceptible to being forced to delay or even scrap activity until supply comes back online.

Experts are slightly more sanguine though.

Thomas Pugh, UK economist at RSM, thinks: “international good shortages should ease over the next year.”

Data from KPMG and the Recruitment and Employment Confederation shows candidate availability dropped at the second fastest rate in the survey’s history.

Companies are strengthening incentives in response to these labour shortages – starting salaries rose at a record rate in the UK in July.

Labour shortages are a bit more complicated. Some workers are likely reluctant to return to jobs from furlough due to fears their role may not be viable in the long term, while others could be holding out for a better offer from another employer.

Lingering concerns about contracting a deadlier strain of Covid are also deterring people from working in the leisure and hospitality sector due to the high levels of social contact that is required on the job.